Topic 4 Flashcards
(16 cards)
What is the primary purpose of financial statement analysis?
To assist users in making informed decisions
Name three sources of financial information.
- Financial review
- Directors report
- Company website
- Chairmans statement
What is the main focus of financial ratios?
To compare the financial health, position, and performance of different businesses
Why is consistency needed in ratio calculations?
For comparison purposes
List the steps involved in approaching ratio analysis.
- Describe the objective
- Obtain the formula
- Calculate the ratio
- Analyse the results by explaining further
What do profitability ratios express?
The profit made in relation to other key figures in the financial statements or to some business resource
What is the formula for Gross Profit Margin?
Gross profit/sales revenue x 100
What is the formula for Operating Profit Margin?
Operating profit/Sales revenue x 100
How is Return on Capital Employed calculated?
Operating profit/Capital employed (Equity+Non-current liabilities) x 100
What do liquidity ratios assess?
A company’s ability to pay its short term debt obligations
What is the formula for Current Ratio
Current assets/Current liabilities
What is a good Current Ratio according to the rule of thumb?
At least 1.5 - 2
What is the Acid Test Ratio formula?
Current assets (excluding inventories)/Current liabilities
What does a good Acid Test Ratio indicate?
A ratio greater than 1
How is the Current Ratio calculated?
Current assets + current liabilities
How do you calculate the Acid Test Ratio?
Current assets - Inventories / Current liabilities
